VCs have always been inextricably tied to Silicon Valley. It’s been a lucrative relationship from the start, with Sequoia Capital investing $150,000 in Apple in 1972 and many more massive investor windfalls in the decades that followed. The structure goes: an innovative founder dreams up an idea, a small team builds an MVP, Angel Investors back the company, and then more and more equity is traded for funding as the company matures towards a public offering. At its best, this system funds world-changing products and software while returning a fortune for the founder and the investors alike. At its worst, it incentivizes growth over everything, diluting the mission and often leading good ideas to fail.
Jonathan Abrams and Kent Lindstrom know all about venture-backed success stories. Both have been startup founders and executives multiple times — at Friendster, Nuzzel and the Founder’s Den — and knew what it was like to raise capital for your company. “As entrepreneurs, we have worked with many of the top venture firms, and had both good and bad experiences. We have also been mentors and advisors to startups, investors in many startups, and LPs in funds,” Abrams says. “Many VCs have backgrounds in investment banking or management consulting and have never been entrepreneurs. Even many VCs with operating experience worked at famous tech companies when they were already big and successful, rather than at startups in the early stages.”
In explaining why he and Lindstrom started their own fund, 8-Bit Capital, he said: “All of the experience and empathy we have from these things informs how we invest at 8-Bit Capital, and how we work with entrepreneurs. We know how entrepreneurs want to be treated, because we are entrepreneurs ourselves.”
Their experience starting burgeoning tech companies gives them an advantage when it comes to investing in Abrams’ view. They understand how to add value in ways investment bankers and management consultants can’t, because they were in the founders’ shoes not so long ago. They also know exactly what to look for when searching for the founders who have the best chance to win. “We have found that entrepreneurs have been pretty excited to have us on their cap tables. First-time entrepreneurs are usually excited to have interest from any investors who can add value and move quickly and with conviction. In both cases, entrepreneurs usually want to focus on building their business, rather than spend excessive time on fundraising,” he says. “And while we have consistently been told that we add more value than many other investors, we actually invest in the founders that we think will need the least help, not the most.”
Abrams and Lindstrom’s 8-Bit Capital is far from the first Founder-Launched Fund. However, it’s arriving at a moment when the idea of founders entering the financing space is exploding. “Andreessen Horowitz, Freestyle, and AngelList were founded more than 10 years ago, and Y Combinator, First Found Capital, and Founders Fund were founded more than 15 years ago. So entrepreneurs starting investing firms does not seem like a recent thing to me” Abrams says. “There has been a recent rise of new funds being started in general. I think part of that is because many of the establishment venture funds grew so big, and part of it may be enabled by new tools like Carta and AngelList, and fueled by an increase in transparency and information sharing via blogs, podcasts, social media, etc.”
What Do Founders Know About Angel Investing?
The advantage of the Founder-Launched Fund is that no one is closer to the problem-set of funding a startup than a founder. They see problems incumbent VCs are often insulated from. They understand founders’ needs in a way a partner at top firms may have missed. At the end of the day, they still have the same driving force behind the fund — an impressive ROI — but they should have novel ways to deliver value towards that goal in forms other than simple financing.
Andreesen Horowitz was an early example of the Founder-Launched Fund. Marc Andreesen and Ben Horowitz had two giant exits as founders and then leveraged their on-the-ground knowledge into winning bets on Facebook, Okta, Github, and many more software companies. They made a point to serve as advisors for many of the companies they invested in and built a structure that supported founders in novel ways: they had a marketing executive in 2010, maintained a team of coders, designers and execs to fill needs at their portfolio companies, and appointed politicians to the board to help startups work with local and federal governments. Andreesen Horowitz famously fines their employees $10/minute that they’re late to a meeting with founders — they’ve built a VC firm obsessed with the idea that founders come first.
In a moment when VC funding was flowing, it was these extra services that often bolstered a16z’s position; during a crowded startup era, the marketing and lobbying arms often helped the a16z portfolio companies win their respective spaces.
A Tech-Based Solution?
The question is: is there another model that can support tech-based innovation? Harry Hurst, the founder and co-CEO of Pipe, believes there is. After a successful exit with Skurt, Hurst and cofounder Josh Mangel launched Pipe to unlock a company’s recurring revenue streams as an alternate funding source in which a founder gives up no equity and doesn’t need to raise capital. Pipe serves as a marketplace on which founders can offer the yield on recurring revenue sources in exchange for capital.
“We are not against other ways of financing companies, including venture capital. Far from it. We are VC-backed ourselves, with investments from some of the largest ecosystem players in the space like Shopify, Slack, Okta, HubSpot, Chamath Palihapitiya, Marc Benioff, Michael Dell, and more. I’m also an equity investor in a number of early and late stage companies,” Hurst explains in a post on Wharton Fintech. “But we do find that growth capital can be costly and that founders pay too high of a price for other types of financing options. In particular, nearly all other forms of financing make you a victim of your own success — as your company becomes more successful, the effective cost of your financing increases.”
What Hurst and Mangel are doing at Pipe is an idea born out of their and their friends’ startup funding experiences. “Before Pipe we saw too many of our friends pour their blood, sweat, and tears into their companies while successive rounds of equity financing diluted their ownership stakes down to the single digits.” Pipe’s model is yet another of an emerging group of new options for founders that does not include giving up a lot of equity for cash. Their model may not be the one that wins the day — but it’s an example of how tech is changing the structure of financing your startup.
The Rolling Fund Moment
The tech company most entangled with the changing modes of startup financing is AngelList, who’s Rolling Funds are creating easier access to capital and a lower barrier of entry for investors.
After selling HeyZap for $45 million, Immad Akhund had a decision on his hands. “After ten years of being an entrepreneur, I finally did have a chance to rest a little bit. I wanted to reevaluate. I had one kid, and another kid on the way,” he explained on Alejandro Cremades’s podcast. “I wanted to think, ‘Do I want to do another startup or maybe become a VC?’ It was one or the other because I wasn’t going to retire at 33.” He’d been a Part-Time Partner at Y Combinator and wanted to try his hand at Angel Investing. He invested in 30 companies the first year and had success but found that he couldn’t have the game-changing effect he wanted at the seed stage. So, he dove back into founding, starting Mercury, a bank built for startups.
Clearly, the itch was not fully scratched in that one year though. Akhund has launched the Immad Akhund Rolling Fund, which is a $10,000+ quarterly subscription fund. Akhund is one of a new class of founders who are running funds in tandem with running their companies. Like Akhund, Austen Allred of Lambda School, Roger Dickey of Made Renovation, Ben Tossell of Makerpad, Sahil Lavingia of Gumroad, Kulveer Taggar at Zeus, and many other Founder/CEOs have their own Rolling Funds on AngelList. Tyler Willis and Noah Horton, the cofounders of AI company Unsupervised, have also run their own fund called Kepler since 2012.
Andreesen and Horowitz parlayed successful exits into lucrative careers as VCs; founders like Akhund have chosen to do both at once.
So, What Exactly is a Rolling Fund?
Put simply, a rolling fund is a new type of fund that allows the manager to invest in opportunities at their own discretion on behalf of the LPs. The LPs often are obligated to make a quarterly subscription-like investment, and the term “rolling” comes from the fact that the fund remains continuously open to new investors.
The draw of a rolling fund is that because the subscription payments happen quarterly, it greatly lowers the barrier to entry for investors. Rather than being on the hook for a massive payment to gain entry to a traditional fund, the rolling fund allows investors to enter for a quarter and then decide to renew or leave every 3 months (depending on the minimum term commitment). The only evident con is that these are new structures — time will tell if there is some unseen downside for investors.
More Founder-Led Funds
Here are some other founder-led funds that’ve caught our eye:
- Austin Petersmith, founder of Racket.com and Capiche, has run Coughdrop Capital with his brother since 2015.
- David Ongchoco, founder of YouthHack and currently doing Growth at Amplitude, angel invests on the side. While still in college, he started the student-run VC firm Dorm Room Fund, which was backed by First Round Capital.
- Julian Shapiro, founder of Demand Curve and Bell Curve, began angel investing in January of this year.
- Kat Orekhova, cofounder and CEO of Vareto and Raphael Danilo, cofounder and CEO at Yobs, started Evening Fund through which they invest in early-stage startups.
- Ramnik Arora, who currently works as Head of Product at FTX, started Toy Ventures — an operator-led early-stage fund — in January 2020.
- Kyle Tibbitts, Head of Marketing at Fast, founded Paradox Capital this January, which pre-seed and seed-stage under-the-radar founders.
“It’s fairly obvious why founders want to take our money.”
In 2018, Superhuman Founder and CEO Rahul Vohra was approached by his friend Todd Goldberg about being LP on a fund he was starting. Vohra had already been dipping his toes into angel investing with the money he’d made from his Rapportive exit, so he came back with a counteroffer: “I said, ‘Here’s something to consider: because we like co-investing, and because Superhuman is used by most founders in the valley, how about we do this fund together?’ We were both blown away by what we’ve been able to achieve with AngelList, and we raised twice the amount that was originally planned,” Vohra explained in an interview on AngelList.
The way Vohra breaks down what attracts founders to his fund is instructive when hoping to understand the rise of the Founder-Launched Fund: “It’s fairly obvious why founders want to take our money — it’s the unique combination of a more than a full-time general partner in Todd, and the ongoing connections, audience, and operational experience that I can provide as an active founder and operator. Put another way, we’ve got one GP who’s 200% on the fund and one GP who’s massively involved in running a fast growing company. We’re bringing the best of both worlds to founders.”
The theory of the Founder-Launched Rolling Fund is that this new breed of fund manager has a specific insight into the market and can deliver relevant and valuable support to early-stage founders. Basically, the fact that they’ve done it themselves means they can identify winners and help them over the finish line.
We’re early in this new stage of the Founder-Launched Fund, but so far, the results are quite promising. We expect the list of founders launching rolling funds on AngelList and elsewhere will only grow over the coming year.